Tunisia, an ‘African Lion’ that can’t roar forever

The northernmost country in Africa has been appreciated for its remarkable economic progress. But, clearly, it isn’t working for all Tunisians, as unemployment has become a major concern

In 1997, the so-called Asian Tiger countries experienced a cataclysmic meltdown known as the Asian financial crisis. What is interesting about the crisis is that it was such a surprise. Most of the countries, including Korea, Taiwan, Hong Kong, Thailand and Indonesia, had during the early part of the 1990s, been growing at an exceptionally rapid rate. Everything in their economies seemed poised for unending growth. But it did not turn out that way. The same might be said for Tunisia.

Tunisia like the Asian Tigers, has been seen as a relatively stable country with a rapidly developing economy. According to the World Bank's country report, "Tunisia has made remarkable progress on equitable growth, fighting poverty and achieving social indicators". The now-deposed leader, Zine el-Abidine Ben Ali, has been praised by numerous world leaders including Ban Ki-Moon, the United Nations secretary-general, the president of France, Nicholas Sarkozy, and the former president of France, Jacques Chirac, who called Tunisia an economic miracle.

It wasn't just world leaders. Many among the ever-expanding universe of international indexes gave Tunisia high marks. For example, in entrepreneur Mo Ibrahim's African Governance Index, Tunisia ranked 8th along with South Africa, Ghana and Botswana. According to the World Economic Forum's Global Competitive Index, which measures the level of a country's burdensome regulations and weak institutions, which inhibit job-creation and private-sector activity, Tunisia was one of the few countries in the region to come close to the average. Although according to The Economist, Tunisia ranked only 144th in its Democracy Index, below China at 136, it was at least ostensibly less corrupt. It ranked at 59th in Transparency International Corruption Index, above Italy at 67 and China and 78.

It was not just the indexes that believed in Tunisia. Tunisia's stock exchange, though very small, has been one of the Middle East's best-performing markets over the past decade. Like many other emerging markets, Tunisia recovered rapidly from the financial crisis and reached a new high just a few months ago, in October. Its investments were considered so attractive that it became a destination for a 'Frontier Fund' run by Morgan Stanley, with money from pension funds, including the Royal County of Berkshire in the United Kingdom.

A study by the Boston Consulting Group concluded that Tunisia was one of a new group of fast-growing economies with the catchy title, "African Lions". These countries, which also included Algeria, Botswana, Egypt, Libya, Mauritius, Morocco and South Africa, were supposed to be the new BRICs, because their growth rates were equal to China, Russia and India, and their per capita GDP at $10,000 was already higher than the BRIC average.
Tunisia also has a fairly high rate of literacy at over 74% and it ranks 18th in the world for expenditure on education. It is also computer literate. Nearly 4 million of its 10.5 million people use the internet with 1.8 million accounts on Facebook alone.

So where did Tunisia go wrong? Was it its oppressive dictatorship? Not exactly. There are other oppressive dictatorships in the world that do quite well. But there is one problem with non-representative forms of government: corruption.

All authoritarian governments everywhere, by definition, are not limited by any legal restraints. This allows elites to become rent seekers often through state-owned companies and monopolies. Without legal limits, the percentage of the GDP that they take for themselves will constantly increase. This was certainly true of Tunisia where president Ben Ali's wife's family dominated the economy. Tunisia's first lady, Leila Trabelsi, and her relatives, seem to have a finger in every pie. Her brother, Belhassen Trabelsi, had interests in banking, car dealerships, telecom and publishing.

Like most developing countries, Tunisia is a relationship-based system. So it is hardly surprising, according to the United States envoy, that "seemingly half" of the Tunisian business community could claim a connection with Ben Ali through marriage. Even a traditionally wealthy family like the Mabrouks, felt it wise to have the scion marry one of Ben Ali's daughters.

The main impact of an economy of corruption is on investment, the investments necessary to create jobs. For Tunisia and many other emerging and frontier markets, this is a major if not the issue. The unemployment rate in Tunisia is officially 13%, but it is probably twice this for younger people. Even university graduates face an unemployment rate of over 15%. This is not unusual for these markets where unemployment rates among younger workers can rise as high as 40%. According to the IMF, the Middle East needs to grow 2% faster every year to avoid its present chronic and high unemployment.

The Asian Crises gave birth to a new phrase in economics,' Crony Capitalism'. This is really a term for a relationship-based system, a system where capital is allocated according to relationships and not efficiently through the market. For investors, the best analysis is the one most ignored, and that is whether the market in any given country actually works.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])  

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    Q3FY11 analysis: HDFC registers good profit , SAIL disappoints on higher costs

    HDFC’s loan growth is likely to moderate with withdrawal of dual-rate product and hike in lending rates. Rising coking coal prices will continue to dent SAIL’s margins

    HDFC's December quarter results were good, but going forward it will face a higher base, moderating demand, and higher cost of funds. SAIL, however, disappointed as higher fuel and raw material expenses and lower realizations hurt its performance in the period.

    Housing Development Finance Corporation (HDFC)

    The net profit of housing finance company HDFC grew by 33% to about Rs891 crore in the December quarter, from Rs671 crore in the corresponding period a year ago. This was at the higher end of expectations. There is a capital gains element of Rs170 crore in these numbers (from the IL&FS stake sale), but this was expected.

    Net interest income (NII) was up by 20% to Rs1,074 crore in the period under review, from Rs895 crore in the previous corresponding period. This came in much higher than expectations. At the upper end, this was expected to be Rs1,110 crore. Disbursements grew by 21% and loans by 20%, both in line with expectations.

    The general opinion is that the mortgage lender is dealing with a higher base and moderating demand and that this will slow down incremental growth, at least slightly. Even while approval growth of 29% indicates a strong pipeline, it is likely that loan growth will moderate with the withdrawal of the dual-rate product and a hike in lending rates.

    HDFC's cost of funds will probably rise further in the fourth quarter as it sees the full impact of a sharp rise in the cost of wholesale funds

    Since the bribes-for-loans scam was revealed a couple of months ago, developers have been finding it challenging to raise loans from public sector banks. This has increased the pricing power of HDFC (and other companies that are funding developers), albeit at a higher risk.

    Going forward, HDFC expects a loan book growth of 15-20% for the year.

    The biggest problem for HDFC, according to market watchers, is valuations. At upwards of five times FY12 price-to-book, it is the most expensive non-banking financial institution. This makes it all the more vulnerable to a slowdown in mortgages and a spike in interest rates. Die-hard HDFC investors say its high quality will ensure that its valuation premium remains intact and that this will protect the downside even in a tough environment.

    The HDFC stock is down about 7% in the past one month, most of the loss has happened in the past one week.

    Steel Authority of India (SAIL)

    SAIL's third quarter results were badly hit by higher coking coal costs and wage provisioning, which resulted in a sharp decline in earnings. There was a sharp drop in EBITDA per tonne from $178 to $112 in the period under review.

    Imported coking coal contract prices nearly doubled to $209 per tonne, whereas SAIL used its higher-priced coking coal inventory (at $225 per tonne) during the quarter.

    Realisations were up by 2.5% y-o-y, and yet disappointing, and saleable steel volumes were up by 12%. More disappointing was that even q-o-q realisations were down despite a price hike in December.

    Coking coal prices are expected to rise to as much as $250-$260 a tonne in the next quarter and will probably continue to dent SAIL's margins.

    However, rising steel prices would help to some extent. Domestic steel prices have risen by Rs1,000-1,500 a tonne over the past month and a further hike is expected soon.

    But market players believe that the SAIL stock is at a risk as it is trading at above its historical average price-to-earnings multiple of 10 times. It has lost almost 10% in the past one week. The share is down 33% over the past one year.

    (This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)

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    A new asset called ‘Frontier Markets’

    These markets in diverse countries like the Philippines, Vietnam and Turkey are being sold as a chance to get in on the ground floor. But it’s important for investors to make distinctions between these markets

    Both emerging markets and the emerging marketing campaign, led by the famous BRIC countries as propounded by Goldman Sachs and James O'Neill, have been very successful. To repeat the success, the modern marketing 'MadMen' of Wall Street have created a new asset: Frontier Markets. Even the venerable Financial Times describes these markets as "a lot like emerging markets a generation ago". So these assets are being sold as a chance to get in on the ground floor of a no-lose growth story.

    A good example of frontier markets is the MSCI Frontier Emerging Markets Index of 26 countries, which basically includes every market not part of another index. A little more discriminating is the selection of the ever inventive Goldman Sachs. Called imaginatively the Goldman 11, these countries include South Korea, Mexico, Indonesia, Turkey, the Philippines, Egypt, Vietnam, Pakistan, Nigeria, Bangladesh and Iran.

    In an attempt to replicate the success of the BRIC brand, there are the CIVETS. These include Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa. The choice of the civet, a mammal, might be accurate. The civet is known for two things: creating very expensive coffee by ingesting and excreting the coffee bean and potentially being the source for an interspecies virus known as SARS (severe acute respiratory syndrome).
    Despite the odd names, there is some truth to the Frontier Market "Story". In the last six months of 2010, the MSCI Frontier Markets Index did outperform the emerging markets by gaining 16.5% against 12.3%. Of course this is a rather recent phenomenon. After doing quite well from 2003 to mid-2008, frontier markets collapsed. Like all markets, frontier markets did recover, but until recently they underperformed not only the emerging market index by 27% but the S&P 500 as well.

    In terms of economic growth, these markets are very attractive, with some of the fastest-growing economies in the world. Their debt burden is often lower than both emerging and developed markets. Their growth seems generally to have a lower correlation to both emerging and developed markets, and at 13 times earnings their equities seem quite cheap. Besides they all have growing populations with young cheap labour.

    But the happy talk only goes so far. There is another side of the story. First, other than marketing, the grouping of frontier markets has no purpose. To place countries as different as Kuwait, Argentina, Bangladesh, Kenya and Estonia in the same group is simply silly. These countries, their markets, economies and growth prospects have really nothing to do with each other.

    Many of the problems for investors in these countries are similar to those in other emerging markets except on steroids. Their legal infrastructures are exceptionally economically inefficient if they exist at all. Many have high levels of political instability and some are nearly failed states. According to Transparency International's Corruption Index, there are countries in this group like Qatar and Estonia which rank fairly well, 19 and 26 respectively. Most do not. Few rank even in the top 100. Countries like Bangladesh, Nigeria and Philippines are all tied at 134.
    Like many emerging markets, they are dominated by state-owned and family-owned companies. According to one ranking provided by the Asian Corporate Governance Association, their corporate governance is rather low. Indonesia and the Philippines ranked at the bottom for Asia with scores of 40 and 37 respectively. In contrast, Singapore has a score of 67 out of 100.
    Their labour forces are young, but sadly their economies are often growing too slowly to provide jobs. Unemployment rates among younger workers are often as high as 40%. Education does not seem to help. According to the International Monetary Fund (IMF), in Egypt, Jordan and Tunisia, the unemployment rate exceeds 15% even for those workers with a tertiary education.

    Also the growth assumptions may be dependent on some potentially short-term effects. For example, the African investment story is based on a belief that Chinese demand will continue. According to recent research at the IMF, the quantitative monetary easing (QE2) in the US has transferred itself almost completely to emerging markets.

    The result is often highly volatile markets. Presently, Chile, Peru, Indonesia, the Philippines, Sri Lanka, Taiwan and Thailand are all at or near all-time highs. In the past, many of these markets have dropped enormous amounts. Egypt, in 2008, dropped 60%. While this was similar to the S&P 500, the recovery has not. While the S&P 500 is only 17% off its all-time high, Egypt is still 36% below its peak. Kuwait has recovered only 4% since 2008 and is still 54% off its all-time high. Saudi Arabia reached its peak in 2006. Even after five years it is trading at only 35% of its peak.

    While the promise is there, it is exceptionally important for the investor to make sophisticated distinctions between these markets. Strategies that might be applicable to more developed markets have no use in frontier markets. And as always, new highs should be a signal for caution rather than the promise of greater profits.

    (The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])  

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